The Union government on Monday expanded the limit of foreign direct investment in the insurance sector to 74 per cent, to attract overseas investors into the sector that has gained importance in Covid-19 pandemic. The existing FDI limit is 49 per cent.
A new structure at the board level was also part of the government announcement on Monday.
Under this, majority of directors on the board of the insurance company and key management persons would be resident Indians, with at least 50 per cent of directors being independent directors, and specified percentage of profits being retained as general reserve.
“I propose to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49 per cent to 74 per cent in insurance companies and allow foreign ownership and control with safeguards,” finance minister Nirmala Sitharaman said while presenting the Budget 2021-22.
It was in 2015 when the government hiked the FDI cap in the insurance sector from 26 per cent to 49 per cent.
Life insurance penetration in the country is around 3 per cent of the GDP, way below the global average of 7.13 per cent, and in case of general insurance, it is even worse at a little less than 1 per cent of GDP, as against the world average of 2.88 per cent.
The government has earlier allowed 100 per cent foreign direct investment in insurance intermediaries.
Intermediary services include insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors and loss assessors.
Besides bringing a new source of funding for the players, this will help in strengthening solvency and improve insurance penetration. There could also be an increase in merger and acquisition activity in the sector according to industry observers.
“The sector finally witnessed a long-standing demand being fulfilled in terms of increase in FDI limit to 74 per cent. This should catalyse the long-term development and growth of the industry. At the same time, steps such as privatisation, increased allocation to healthcare and infrastructure, voluntary scrapping of vehicles policy are positive for the sector. What remains to be seen is the timely implementation of these measures,” said Bhargav Dasgupta, MD and CEO of ICICI Lombard.
“It will certainly help attract larger foreign investment, technical know-how and strengthen the ability of the insurance sector to become globally competitive. This is also a great move to attract more capital to expand the business and it would also potentially boost the government’s divestment programme,” said Rakesh Jain – ED & CEO, Reliance General Insurance.
“It would foster the growth of the insurance industry and take it to the next level by bringing in global products, practices, and sales strategies to India’s insurance market. Insurance is a very efficient form of protection for general public and it is essential that it reaches everyone in India from big cities to small villages, and this move will facilitate the inflow of capital that would be required to accomplish this,” said Roopam Asthana, CEO & whole-time director, Liberty General Insurance.
HDFC Life managing director and CEO Vibha Padalkar said FDI increase in insurance, continuation of the disinvestment program and ease of tax compliance are welcome steps.
Moody's Investors Service senior analyst (financial institutions) Mohammed Ali Londe said the proposal to increase the FDI limit for insurers to 74 per cent is credit positive for insurers. “The possibility of higher foreign ownership would improve insurers' financial flexibility by offering additional opportunities to bolster solvency. In addition, insurers would benefit from the sharing of risk management best practices, possibly leading to a lowering of exposure to high-risk assets and adoption of risk-based capital management,” he said.
These benefits are expected across the insurance market as the government has simultaneously announced that it will take LIC to IPO and privatise one of the government-owned general insurers, which along with the changes in foreign-owned insurers will cumulatively improve the pricing discipline of the market's underwriting performance given their dominant positions, Londe said.